A new report published by the Bank of Canada finds that fragmentation in the Canadian equity markets has reduced trading fees and stoked competition, but has brought added systems costs and risks, too.
Thursday’s Bank of Canada Review includes a paper examining the effects of market fragmentation. “Overall, we find that market fragmentation has reduced trading fees and created an environment that facilitates innovation,” it says.
However, it notes that fragmentation has required market participants to invest in technology to manage trading at multiple venues. “The cost advantages from reduced trading fees do not necessarily offset the large, fixed costs of this investment, especially for smaller dealers,” it says. And, it suggests that fragmentation has also “created new complexities in the market that may increase operational risks.”
Moreover, the report says that its research hasn’t detected any clear effect, either positive or negative, on market quality, as measured by liquidity and price efficiency. “Our simple analysis of measures of market quality finds that the long-term trend of improving market quality has continued alongside increasing market fragmentation,” it says, adding that more research is required.
“Much work is still to be done to fully assess the impact of fragmentation and other changes to the structure of the equity markets in Canada, including recent events such as the Maple Group’s acquisition of Alpha and the potential future entry of the Aequitas trading venue,” it says.
“A full assessment of the impact of these events on market quality would provide regulators and market participants with a foundation for analyzing additional instances of fragmentation that will likely occur in the future,” it suggests.